Some projects appear to literally throw money away. Materials are wasted, broken, left to be damaged in the weather, or have to be carted to the landfill (at additional cost) because they were left over at the end of the project. Equipment lies around unused, other equipment is damaged, or the inappropriate equipment is used for tasks on the project. It doesn’t seem hard to cut costs on a project by 2 or 3%? That seems to be a low number, is it even worth bothering?
How do you calculate construction profit margin?
Consider this, if your project cut costs by 2 to 3 % it means that the profit will increase by a similar number. Again this sounds like a small number. But let’s consider that most projects are priced with a 10% construction profit margin (if we are really lucky it’s 20%, but in a tough market it could be 5% or less). So, if your project makes an additional 2% profit then the profit increases from 10% to 12%, which is actually a jump in profit of 20% – not too bad! In fact, most medium and large construction companies only make around 4 to 6% profit in a year – go on and check the results of the listed contractors. Therefore most companies would welcome a lift in profits of another 2%. Cost saving can get you those extra percentage points.
But does the construction team truly realize how easily they can dramatically influence the company’s profitability? Sure, there are many other things that can also positively and negatively impact construction profit margin, but everyone on the project has a direct influence on profits.
10 ways to increase construction profit margin
Let’s consider 10 ways we can reduce costs on our projects. In a follow-on article, we will consider other ways.
1. Finish your project on time
This would seem obvious advice, yet frequently contractors remain on the project long after they should have completed it. Even when the project is handed over to the client contractors often remain on the project, completing items on the punch list or fixing defects, for weeks and even months. Ensuring that quality work is produced, and those punch items are attended to as work progresses will reduce the time spent at the end of the project correcting defects.
Plan how the project will be completed on time so that no outstanding items or documentation will delay completion. Remember, people, remaining on the project after it should have been completed cost money. But also, an incomplete project usually means that the client hasn’t released final payments, bonds and retainage monies which add to the costs.
2. Improve productivity
It’s not hard to increase the productivity of people and equipment by 5%. Are everyone and every item of equipment on your project 100% productive? Is there a better way of working? Do you have the right match of equipment and skills? Look around the project – are people standing? Is equipment standing? Why? Continually look at ways to improve processes.
2. Reduce waste
Materials are wasted when they are broken. Why? Is it because they weren’t packaged properly, because people are careless, maybe because they aren’t used correctly. Of course, frequently materials are wasted because too much is ordered.
3. Negotiate reduced rates for equipment hire
For inclement weather, low usage, and site closures. Equipment hires companies frequently charge for the equipment every day it is on the project – whether it’s being used or not. If the machine is going to be on the project for a lengthy time negotiate with the supplier that you don’t pay when it rains or when the project is closed.
4. Prevent theft
Theft of materials, tools, and equipment and even time is rife on all projects. Put systems in place to detect and deter theft.
5. Adjudicate quotes and prices thoroughly
Is the price you received really the cheapest? What hidden costs are there? Then ensure that orders are clearly shown what’s included.
6. Check hired equipment when it arrives
Hire companies to expect their equipment to be returned to them in good condition and usually with a full fuel tank. You will be charged for damage and additional fuel. It’s important to record damages on the machine when it arrives and report this to the hire company, otherwise, you may be paying for this damage. Record the fuel level. Why should you be returning the machine with a full tank when it was empty when it arrived. An excavator could take a hundred gallons of fuel!
7. Control over time
Why pay someone 50 to 100% to do the same job. Yet that’s what happens when workers on the project work beyond their normal hours, or on weekends and holidays. But more importantly, people can’t be productive if they work 10 hours or more every day. We all get tired after a hard day’s work.
Sure, sometimes some people have to catch up lost time on the project or work longer to complete a task that must be ready for the next day. But control who works longer, ensure there is supervision so that they are productive and ensure the hours worked are recorded correctly.
8. Protect existing structures and new work
Frequently newly completed work is damaged by the following trades. Fixing work damaged by others costs money and takes resources away from completing the project. Workers must respect the work of others. Care must be taken when working around other structures. Put measures in place to protect completed work. Protecting and respecting the work done by others could be a topic for discussion at the tailgate or pre-start meetings.
9. Check that people are working the hours they are paid
On many projects timekeeping is poor. Workers clock in and then take 10 to 15 minutes to get to the workplace. Before each rest break, they leave their work place 5, 10 and even 15 minutes before the official start of the break. They dawdle back equally late at the end of the break. At the end of the shift, everyone is queued ready to leave the project site 10 minutes before shift officially closes.
Before you know it each worker is working 30 minutes to an hour less than they are paid. That effectively means that if the normal shift is 8 hours long then each worker is working 15% less than they should. But of course it’s not just the workers, it probably also means that the equipment is also working less time. It all adds up very quickly. A little bit of discipline can easily save money.
Cutting costs is about working a little smarter, it’s about doing things slightly differently. A little extra effort and care will cut costs and make a big difference to the construction profit margin.
Share the information with your team. Do they know what things cost? Do they realise how that extra 5 minutes longer on either side of rest and meal breaks quickly adds up to 30 minutes, and how 30 minutes multiplied by 20 people results in 10 hours being lost – every day?
Please share your tips for cutting costs.